TD Bank Financial Group (TSX:TD) reported a decline in third-quarter profits Thursday and warned of trouble ahead as difficult economic conditions weakened the performance of some of the bank's U.S.-based operations.

"It's unlikely that this level of earnings can be maintained," admitted TD chief executive Ed Clark in a conference call Thursday.

"But we do have an excellent business that continues to perform well and produce solid returns on capital with very tight risk management."

TD's financial performance was "great" in the quarter, given the ongoing economic weakness around the world, said Clark.

"There probably aren't many people on this call frankly, including me, who thought we'd be having this kind of performance in the midst of a recession," he said.

"At the beginning of 2009, I would have found it hard to believe that by the third quarter I'd be talking about year-over-year increase on our earnings per share, even after issuing shares last year, but it certainly looks like we're going to be there."

The Toronto-based bank reported a profit of $912 million or $1.01 per share for the quarter ended July 31, down from year-earlier profits of $997 million or $1.21 per share.

The bank said adjusted earnings rose 17 per cent to $1.3 billion or $1.47 per share from $1.1 billion or $1.35 per share reported a year ago. The adjusted results beat the estimates of analysts surveyed by Thomson Reuters, who predicted earnings would come in at $1.23 per share.

TD said total quarterly revenue rose to $4.66 billion from $4.32 billion, while provision for credit losses declined to $557 million from $656 million.

TD's Tier 1 capital ratio, a key metric measuring the amount of money held in reserve, stood at 11.2 per cent at quarter's end.

Clark gave credit to governments and central banks around the world for responding "both quickly and appropriately" to the global economic crisis, but said there are concerns about the extent of the recovery.

"We have never been tested by conditions this tough, but we were up to it," he said.

"It seems like we're through the bottom, but there's clearly a debate going on about the strength of the subsequent economic recovery."

Results got a boost from TD's wholesale banking operations, where profits soared nearly 90 per cent to $327 million. Net income also improved five per cent in the Canadian personal and commercial segment, which recorded profit of $677 million.

Earnings in wealth management were dragged down by weak market conditions, while loan losses drove profits in U.S. personal and commercial banking down to $172 million.

Clark said TD didn't anticipate the resilience of the Canadian resale housing market.

"The structure of Canadian housing and mortgage markets provides an enduring strength for the economy and for our business," he said.

The bank also announced Thursday that Clark had advised of his intention to exercise up to 390,000 options for TD common shares, which represents 13 per cent of his outstanding options.

Clark intends to donate approximately 10 per cent of the pre-tax net proceeds to charity, and to sell the remaining acquired shares.

TD shares were up just over $2 in late Thursday trading at $62.62.

New home construction in Canada was nearly unchanged in September as a decline in single-family homes erased a jump in multiple dwelling units, and economists predicted the credit crunch would lead to a slowdown in ground-breaking.

Housing starts inched to a seasonally adjusted annualized rate of 217,600 units from an upwardly revised 217,400 units in August, Canada Mortgage and Housing Corp. said on Wednesday.

The September number beat the consensus expectation of analysts who had called for 203,000 starts. August starts were originally reported at 211,000 units.

While construction activity again stayed above the 200,000 unit mark, some analysts said this level would not likely be sustained in months to come.

"Because residential building permits tanked in August and the credit crunch reached a crescendo in September and into October, this could well be the last starts print north of 200K," Scotia Capital economists wrote in a report.

Canadian housing data has been in stark contrast with the state of the housing market in the United States, hit by a crisis that began in the subprime mortgage sector and spread across other parts of the market and the broader economy.

Economists generally expect the Canadian housing market to ease but not fall into crisis as it has in the United States, largely because risky mortgages are not a large part of the market. Even so, the Canadian economy is also expected to slow, which would likely soften demand for housing.

"This slowdown, however, is expected to be both measured and orderly, and in no way do we expect the extent of the correction to be comparable to that currently taking place in the U.S.," said TD Securities strategist Millan Mulraine.

Gains were reported across the country, except in Ontario and Quebec. British Columbia and the Atlantic provinces both reported 10 percent gains, followed by the Prairies.

Urban single home starts declined 8.1 percent to 70,000 units from 76,200, while urban multiple starts rose 5.5 percent to an annual rate of 122,500 units from 116,100 in August.

Rural starts were estimated at an unchanged seasonally adjusted annual rate of 25,100 units in September.

The strong housing market of the last few years has now cooled down as supply and demand have come more into balance, but prices will still rise this year, though not by double digit figures of the past, says CEO Phil Soper of Royal LePage Real Estate Services.

Through the rest of this year and into next, he said, Royal LePage's second-quarter statistics released Thursday suggest that average prices will creep up by about 3.5 per cent.

"When you're looking at the real estate market, it's important to look at not just house price changes, but also the changes in activity levels," he said.

"There are significantly fewer homes trading hands now than there have been in the boom years of this decade," he said. "It's a moderate market."

Royal LePage's report followed one from the Canadian Real Estate Association on Tuesday indicating that average house prices in June fell 0.4 per cent compared with a year ago for the first time since early 1999.

CREA's figures suggested that house prices were "basically flat" in June, said Soper, adding they were somewhat skewed by the fact that the association was unable to include Montreal in their results due to a reporting foul up.

He estimated Montreal is about 10 per cent of the country.

"If you look at our numbers, Montreal had a price increase year-to-date in the four per cent range," Soper said.

While prices are forecast to move higher, the country's largest real estate company predicts the number of transactions this year will fall by 11.5 per cent to 461,000 units.

Along with an easing of pent-up demand, it also attributed the slowdown to jitters among prospective buyers because of economic uncertainty following layoffs in the manufacturing and forestry sectors due to the subprime mortgage fiasco in the United States and worldwide credit crunch.

Avery Shenfeld, senior economist at CIBC World Markets, said earlier this week that there has been a noticeable softening of the housing market over the past few months.

"Some of that is coming in cities where prices had gone through the roof in the previous one or two years," he said.

In the second quarter, the average price of detached bungalows rose by 5.6 per cent from a year earlier to $351,587. Two-storey properties increased 5.2 per cent to $418,943.

"After several years characterized by a persistent shortage of listings, home buyers have felt the pressure of bidding wars and take-it-or-leave-it counter offers ease during 2008," Soper said.

"Home sellers have had to come to grips with the longer time it is taking to sell properties, but can take comfort in a market that continues to support reasonable price increases."

The survey of 17 cities across the country found lower prices in two major markets - Edmonton and Calgary.

In Edmonton, the average price for a bungalow dropped 14.5 per cent while an average Calgary two-storey dropped six per cent.

The greatest price increase was in Regina, which has seen home values surge as higher commodity prices have driven the regional economy.

In Regina, all types of housing saw higher prices, even though inventory of homes increased five-fold, the survey said.

Across the country, said Soper, some regions are slightly oversupplied right now with houses, in particular Calgary and Edmonton. Meanwhile, supply shortages are still being reported in Regina, Saskatoon, St. John's and Winnipeg.

For most of Canada, however, the number of people looking for homes is approximately equal to the number of homes available for sale.

"The housing market is a cyclical one," said Soper. "We've gone through an extended period of excess demand which has caused prices to rise at an unusually high rate."

"What we're seeing at the end of the cycle is that there are fewer numbers of new buyers in the market because they've got their homes."